Hong Kong shines as Asia mostly up before FOMC

V.Phani Kumar

HONG KONG (MarketWatch) -- Hong Kong rallied while most Asian markets ended slightly higher as investors awaited the results of a meeting of U.S. Federal Reserve officials, shrugging off a strong performance by Republicans in the U.S. midterm elections.

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Hong Kong’s benchmark Hang Seng Index (HSI) rose 2% and reached a 28-month high, led by port operators and Chinese lenders amid continued signs of a strong local economy.

Other markets posted more modest moves on lower volumes, on a day when Japan markets were closed for a holiday. Currency moves were slight ahead of the expected Wednesday statement by the Fed’s Open Market Committee. Markets widely expect the Fed to announce a new program of U.S. Treasury bond purchases aimed at pushing long-term interest rates lower, an effort known as quantitative easing.

“I don’t really think the elections have any obvious direction as far as the U.S. economy is concerned. More important would be how [the Fed’s] quantitative easing will play out on inflation impact [in Asia]… The market realizes that we are in uncharted territory on that one,” said David Cohen, director for Asian forecasting at Action Economics

Dow Jones Industrial Average
DJIA, +0.72%
futures were flat in screen trade. Results of Tuesday’s midterm elections in the U.S. showed the Republican Party took control of the House of Representatives, while the Democrats managed to keep their majority in the Senate.

Market watchers said the results of the U.S. election were in line with expectations. Of greater concern is the longer-term impact of any efforts by Republicans in the House to cut spending or to adopt a more-bellicose tone with China on the value of the yuan. “The fiscal policy of a Republican Congress will probably not be too different from a Democratic Congress,” said Barclays Capital analyst Raghav Subbarao in a note.

But he added that “increased influence of Tea Party candidates could lead to an increase in protectionist rhetoric and make Congress more activist.”

Credit Agricole said that a grid-locked Congress was one factor for markets to consider. “Consequently the ability of fiscal policy stimulus to complement monetary policy looks limited given the slim likelihood of further stimulus measures being agreed,” it wrote in a note to clients.

Citic Pacific rose 3%, continuing to outperform the broader market as the recent appreciation in the Australian dollar highlighted the value of the conglomerate’s Australian iron ore assets.

“There is just too much hot money,” said Anthony Lam of Emperor Securities.

Banks also outperformed in Shanghai, although those gains were offset by losses in the coal and metals shares, where investors continued to lock in gains after sharp advances recently. China Shenhua Energy (601088)
CSUAY, +0.00%
fell 1.5% and Jiangxi Copper (600362)
JIXAY, +8.28%
tumbled 6.4%.

Westfield remained on a trading halt after it announced plans Wednesday to spin 54 Australian and New Zealand shopping centers into a new company, which will raise up to 3.5 billion Australian dollars (US$3.5 billion) through a share issue.

“That’s [capital raisin]) going to be a bit subduing to our market because people have to find the money from somewhere,” said George Kanaan, head of sales at UBS in Sydney.

Foreign-exchange markets moved in a narrow range after the elections and ahead of the Fed outcome. The U.S. dollar fell broadly Tuesday as investors piled into riskier assets following a surprise rate increase from the Reserve Bank of Australia.

With the focus now squarely on the FOMC’s decision, markets can “expect subdued trading as traders square positions and reduce risk exposures heading into the Fed meeting,” said Mike Jones, currency strategist at the Bank of New Zealand. “The Fed is widely expected to kick-start a fresh round of asset purchases, but estimates of how much vary widely so higher volatility in the U.S. dollar is likely following the announcement.”

Mr. Jones also said the results from the U.S. mid-term elections could impact currency trading, although he noted that a shift in power on Capitol Hill appears to have been priced in.

The euro was at $1.4035 from $1.4034 late Tuesday afternoon in New York, and at 113.20 yen from 113.18 yen. The dollar was fetching 80.65 yen, compared with 80.64 yen. The Australian dollar, which tapped a fresh post-float high of US$1.0025 on Tuesday, was recently buying US$0.9979.

Spot gold was at $1,354.80 per troy ounce, down $2.70 from its New York close Tuesday. December Nymex crude-oil futures were up 37 cents at $84.27 per barrel on Globex.

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